Global use of yuan to see 'major leap' in 2013

China will promote the opening-up of its financial market to both domestic and foreign players this year to attract wider use of the yuan globally, a senior official at the People's Bank of China said on Wednesday.

"We'd like to enhance the cross-border circulation of the yuan in domestic and global markets," said Xing Yujing, secretary general of the central bank's Monetary Policy Committee, adding she believes the yuan cross-border business will see an even greater leap in 2013 than last year.

The bank this year will promote a pilot program of renminbi-denominated qualified foreign institutional investors, and prepare for a trial program to allow qualified domestic individual investors to trade in overseas capital markets directly.

"We plan to gradually develop individuals' cross-border yuan business based on market demand, after starting a trial program in Yiwu, Zhejiang province, that allows residents to use the yuan to settle cross-border business," she said at a forum in Beijing.

"We didn't set any target figures for the plan, but we indeed see rising trend of the currency's market demand," she said.

Any fluctuation in the yuan's exchange rate will have a very limited effect on its cross-border usage, Xing said.

To put more yuan in the global market, the central bank has made simplifying cross-border settlement and auditing procedures a top priority.

It also vowed to enhance currency swaps and currency settlement agreements with other countries and regions.

By the end of 2012, China has signed settlement agreements involving a total of 1.6 trillion yuan ($257 billion) with 18 countries and regions, Xing said.

"The key to promoting the yuan's usage globally is developing more yuan-denominated investment products outside of China," said David Koh, head of Greater China Treasury Services at JP Morgan, the biggest US-dollar clearing bank.

"It may take years for a substantial change to take place. Currently, such investment channels are too limited, while interest rates paid on yuan deposits held with banks outside of China are not that attractive."

Koh said the uneven use of the yuan for international trade by Chinese companies across different industries has also restricted the global flow of the currency.

"Logically, larger companies that have greater leverage when negotiating contracts could do more," he said.

The global use of the yuan as a trade and investment settlement currency continued to rise in 2012, according to the central bank last week.

In 2012, cross-border trade settlement in the yuan rose 41 percent to 2.94 trillon yuan, while investment settled in the currency rose by 153 percent to more than 280 billion yuan.

Outbound direct investment in the yuan went up by 45 percent from 2011, while yuan-denominated foreign direct investment surged by 177 percent.

Internationalization of the yuan is a prelude for full convertibility under capital accounts, which won't be far away from the current phase of extending QFII and QDII, said Tommy Ong, senior vice-president of Treasury and Market at DBS Bank.

"In addition, in two years the currency would be widely adopted by other economies as a reserve currency," he said.

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